Losing the right to limit: Privy Council confirms parties can contract out of the 1976 Limitation Convention

This Alert looks at the question of whether it is possible to contract out of or waive the right to limit liability under the 1976 Convention on Limitation of Liability for Maritime Claims and if so, what is required in order to do so. We look at the recent Privy Council decision in Bahamas Oil Refining Company International Limited (Appellant) v. The Owners of the Cape Bari Tankschiffahrts GMBH & Co. KG (Respondent) under English law.

It is a common practice for the Master of a ship to sign various agreements which bind the vessel’s owners. In many instances, the agreements are presented under time constraints, late at night; and while the Master may not understand the legal content, he may feel that he has no option but to sign. It would then come as a nasty surprise if the ship-owner was to discover later that the Master had unwittingly waived the owner’s statutory right to limit liability for damages. The result could leave the ship-owner in a difficult position, with its insurance cover voided and a large, unlimited bill for damages.

The Owners of the Cape Bari found themselves in this position in the matter of Bahamas Oil Refining Company International v. The Owners of the Cape Bari, which came before the Judicial Committee of the Privy Council recently, on appeal from the Court of Appeal in the Bahamas.

The Cape Bari case This case involved a collision between the vessel and the Appellant’s, (BORCO), sea berth while under pilot navigation. Prior to entering the terminal, the Master of the Cape Bari signed a document which set out the “Conditions of Use” of the berth. Such contracts are standard in the trade and are often compulsory. Shortly afterwards, the vessel collided with a sea berth while under the navigation of a local pilot, causing damages alleged to be around US$22 million.

The Owners argued that they were entitled to limit their liability to US$16.9 million plus interest under the 1976 Convention on Limitation of Liability for Maritime Claims (the 1976 Convention), which was incorporated into Bahamian Law. However, BORCO argued that by signing the Conditions of Use, the Master had, on behalf of the Owners, contracted out of the right to limit liability under the 1976 Convention. In making this argument, BORCO relied specifically on Clause 4 of the Conditions of Use, which provided that the Owners would be responsible for “any and all loss or damage” caused by the vessel’s use of the terminal facilities.

Following a series of decisions in the Bahamas, the matter was referred on appeal to the Privy Council, which held as follows:

It is possible to contract out of or waive the right to limit liability under the 1976 Convention. There is nothing in the words of the 1976 Convention which makes this impermissible.

However, for a party to be held to have abandoned or contracted out of valuable rights arising by operation of law, the provision relied upon must make it clear that that is what is intended. When construing whether the words of a contract seek to waive a statutory right, the starting point is that the statutory right in question is treated as being known and understood by the parties to apply and is treated as being written into the contract. That remains the position unless there is a provision in the contract which clearly and unequivocally excludes that right such that the two cannot be read together and the statutory right must therefore be excluded. The more valuable the right, the clearer the language will need to be.

It may be possible to exclude the right to limit without express reference to the statute, but the right must be clearly excluded, whether expressly or by necessary implication.

In this instance, it was found that the wording of Clause 4 of the Conditions of Use did not clearly exclude the Owners’ right to limit liability. On a true construction of the Clause, if the Owners were found liable to BORCO, the latter would simply be entitled to an indemnity up to the maximum recoverable under the 1976 Convention.

Practical guidance

The Cape Bari case has now confirmed that it is possible to contract out of the valuable right to limit under the 1976 Convention. However, in order to do so, an indemnity agreement (or indemnity provisions in an agreement) would need to exclude this right clearly and unequivocally, such that there is no doubt as to the reasonable observer that the owner agreed to waive the right to limit.

This decision will prompt many terminals and similar facilities to amend their contracts of use to include express waivers of the right to limit liability.

The key take-away for ship-owners (as well as charterers, managers and operators of vessels) is that vigilance must be exercised when entering into contracts. Such parties must take care to have proper infrastructure and safeguards in place to avoid an agent contracting blindly on their behalf. For example:

a. No matter how urgent, the Master should always refer contracts back to the owner’s or vessel operator’s legal team for review before signing.

b. If that is not possible, the Master should be guided to execute agreements with the qualification of “receipt only and without authority to bind the Owners or the Vessel”. This latter step is not fool-proof but, in certain circumstances, may serve to avoid binding owners to unwanted contracts.